City Journal

Kafkaesque regulations have turned builders into a cartel of political wheeler-dealers. The result: an economy-dampening shortage of offices and apartments in New York.

Autumn 2000

A flurry of recent news stories report that a scarcity of apartments and office space is putting a damper on New York City's ebullient economy. Businesses are having trouble hiring skilled help because out-of-town candidates balk at the high rents and hard-to-find apartments. Some companies, unable to find office space to expand in Gotham, are leaving town. One explanation the papers have offered for the space shortagethat the booming economy has used up the city's available landis laughable, as anyone knows who has recently taken a drive around Manhattan, let alone the rest of the city. Practically within walking distance of midtown, you'll find whole swatches of derelict property, crying out for development.

So if Gotham hasn't run out of physical space, why aren't its developerswhose forebears erected the Empire State Building in only 13 monthsresponding to the city's real-estate crunch? To get an answer, just look at today's New York developer. He's not Ayn Rand's Howard Roark, balancing heroically on a steel beam high above the sidewalk, urging his construction crew to work harder, faster. He's a political wheeler-dealer, whose principal activity is perfectly summed up in the almost self-parodying title of Donald Trump's book: The Art of the Deal.

Of course, he can't help being a wheeler-dealer if he wants to build in the city. That's because complying with New York's Kafkaesque zoning code and its banana-republic process for approving building projects requires first and foremost a Herculean exercise in politics. It is hugely time-consuming and very expensive, not only because time is money, but because a developer has to schmear people, both publicly and sometimes not so publicly, every step of the way. One high-powered city developer put it bluntly: "You have to be a conniver to get things done."

Old-time New York builders had the luxury of working under the simple, 35-page zoning code of 1916, which, in urbanist Alan Ehrenhalt's words, "concentrated on giving some stability and order to what was already there and resolving the most serious problems in the least intrusive way possible." Under its rules, for example, you couldn't build a slaughterhouse in a pleasant residential neighborhood, but you could build housing anywhere in the city, and you could build anything you wanted in certain unrestricted areas. To prevent New York from becoming a city of shadows, your building had to get thinner as it rose higher, producing the familiar wedding-cake architectural style of the Empire State Building and other period edifices. Otherwise, real estate was in the market's creative hands.

Under this code, handsome new buildings shot up at a feverish ratea remarkable one per working hour during the 1920s boom, according to a Valentine's Manual from the time. In 1927, developers built 90,000 new housing units. Nowadays, Gotham throws a party if 10,000 new units go up in a year, when it really needs 40,000 a year to replace crumbling older buildings and to keep pace with the influx of new immigrants. Most of today's new units are luxury apartments. Not so under the 1916 code: "Back then, my grandfather erected buildings in which the people who worked on them could afford to live in them," says Mark Perlbinder, a third-generation New York City developer.

Everything changed in 1961, however, when Mayor Robert Wagner and Faustian master builder Robert Moses imposed a new zoning code that swapped the market's invisible hand for the vision of central planners, dictating every jot and tittle of what a developer could build and where he could build it. Wagner's and Moses' key ideas seem crazy from the perspective of hindsight. At a time when New York manufacturing employment (much of it low-paying) was already beginning its long decline, they zoned whole sections of the city for manufacturing. Thinking that the city's population was growing too quickly, they forbade residential development in industrial and commercial parts of the city, so that great swathes of the five boroughs, including much of the precious waterfront, is off-limits to would-be builders of apartments or of offices for twenty-first-century businesses. And they wanted the city to embody the vision of the then-celebrated Swiss architect Le Corbusierwho favored giant, boxy towers isolated in big, open plazasso they allowed builders to make their edifices taller, and so boost rental footage, if they set them back from the sidewalk and surrounded them with open space. These three principles they enshrined in a code of stupefying complexity. It established ten residential, eight commercial, and three manufacturing districts, with density restrictions that varied almost site by site within each one, creating a virtually impenetrable jungle of zones.

Residents of the city's neighborhoods were aghast at the overbearing glass towers and windswept plazas that the new code encouraged to shoot up next door to low-rise brownstones across New York. A neighborhood-led "counterrevolution," in current city-planning chief Joseph Rose's phrase, ensued. Over the last few decades, in response to this neighborhood outrage over the 1961 code, the city carved out an additional 38 special zoning districts from Bay Ridge to Little Italy. These districts have their own regulations, aimed at preserving the neighborhoods' architectural integrity. Layered onto the original, hypercomplex 1961 rules, the metastasizing regulations have helped swell the city's zoning code to 900-plus pagesas I discovered when Rose dropped them in front of me with a resounding thud during an interview.

This complexity transformed the builder into a political operator. To build within such a painstakingly detailed and constricting code, a developer almost inevitably had to request zoning changes. To get those changes, however, he had to appeal to the Department of City Planning and to top city officials, who could derail his project at any time. The late developer Seymour Durst, who began his career under the 1916 rules, complained 20 years ago about the arbitrariness of doing business under the new regime: "During the past ten years, the Planning Department has been the law and the law has been whatever suited the fancy of city planners." To be successful, a builder now had to make sure he was on the right side of government bureaucrats.

To make matters even worse, beginning in the mid-seventies, the developer now had to go through a heavily politicized process for approving any building proposal that needed re-zoningin other words, almost any significant proposal. Called the Unified Land Use Review Process (ULURP), it forces the builder to seek level after level of city-government approval before getting a final pass on his project. One real-estate lawyer likens it to "a Minotaurian maze"take a wrong turn and you're dead.

The ULURP completed the transformation of the builder into the politician. True, at the lower levels of the processthe neighborhood community boards and borough presidentthe opinions offered on a proposal are only advisory. But higher-level city officials sometimes pay attention to them, so the developer can't ignore them. And once you get past the lower levels, the city planners, the City Council, and the mayor all have the power to scuttle a project. The whole process forces the developer to devote most of his energy for about eight months to making politicians happy instead of getting steel riveted and bricks mortared.

Thanks to a 1976 state law, the developer must also submit his proposal (if it requires re-zoning) to the most exhaustive environmental review in the nation, which typically takes 18 months to complete. It looks at a project's potential impact on everything from population concentration and noise to smog and endangered species. The review, or Environmental Impact Statement (EIS), is as costly to the developer in consulting and legal fees as it is time-consuming. Says environmental lawyer Michael Gerrard, "A good-size EIS will cost several hundred thousand dollars, but it could be more than a million."

A developer needs not just the political skills of Boss Tweed but also lots of up-front cash to negotiate this labyrinth. Say you want to build a luxury apartment complex in Manhattan on an abandoned plot. First, you'll need to find out whether zoning changes are in order. "No longer can an architect look at the zoning map and tell you exactly what you can build on it," complained developer Joel Banker a while back. If you need changes, as is likelythe Department of City Planning will let you know for sureyou'll need to get the ball rolling on the expensive environmental review.

To get through the ULURP, you'll need to make massive contributions to mayoral and city council political campaigns, supporting Democrats, Republicans, and even minor-party candidates to give you the necessary political clout. "It is uncomfortable," New York developer Douglas Durst said in 1998 of the constant contributions he had to be handing out. "What goes on in my head is, what happens if I say no?" Not many New York developers seem willing to risk it. They are the top political contributors in the city, outpacing even trial lawyers and public-sector unions.

You'll have to lobby like crazy, too. Ten of the top 14 biggest spenders lobbying city hall in 1999 were looking for zoning changes and approval on building proposals for their clients. It's not just the mayor's office and the City Council you'll need to win over. You'll have to hire a "liaison" to the relevant community boardusually a political insider who'll make the right phone callsand wage a pricey public-relations campaign to convince wavering board members that your luxury apartments are a good idea. You will need the borough president's help as well. "That means I have to hire an attorney on good terms with the president's office and work my way through," says one prominent developer.

Without the right legal help, you haven't got a chance. "You have to know who to hire and when to hire them," a senior Giuliani administration official tells me. New York's post-1961 zoning regime and review process has spawned a small industry of high-priced lawyers and lobbyists, often former government officials, who know how to find zoning loopholes and "expedite" the approval process. Speaking to the New York Times, big-league attorney Sandy Lindenbaum described what he does for Gotham builders. "They don't need me to call the mayor," he said. "But if what they need is a change in zoning, you don't call the mayorso they call me."

If Lindenbaum's forte is zoning, other lawyers specialize in persuading politicians to sign off on a builder's proposal. John Zuccotti (in the Koch years), Sid Davidoff (in the Dinkins years), Ray Harding (today)all are political insiders who act as premium escort services to developers to guide them through the city's real-estate bureaucracy.

In exchange for their backing in the approval process, the politicians get to impose conditions on the big developer. Sometimes the conditions are highly unsavory. Community board members "are often in business," says one builder. He recalls a Manhattan board member who offered developers a deal: he'd give his thumbs up on their building proposals if they gave his advertising firm some business.

On other occasions, the developer must publicly agree to bankroll the politician's pet causes. To get then-borough president Ruth Messinger on board for his Riverside South development project on Manhattan's West Side, Donald Trump had to promise to set aside for low-income residents 10 percent of the luxury apartments he wanted to build and spend another $5 million sprucing up the 72nd Street subway station. The City Council piled on its own demands before giving Trump the okay: he'd have to cough up $500,000 on senior-citizen, youth, and job-training programs and agree to hire a quota of 20 percent women and minorities on the project. Where else in the nation would a developer have to agree to fund social services?

How far these agreements get honored is unclear. Such deals would require an efficient and talented bureaucracy to monitor the developer's compliancesomething noticeably absent in New York. But the politician at least gets to announce that he's shaking down the rich developer for a "progressive" goal, while the developer gets the green light to build his apartments.

This political and regulatory rigamarole is a major reason building a high rise in New York costs 17 percent more than in nearby Jersey City and 31 percent more than in Atlanta, and that it takes five years to put up a structure that would take 18 months to build elsewhere in the region. There's a hidden cost, too, the authors of a recent New York University law school study claim: projects never get started because of the "chilling effect" New York's building climate has on builders. No wonder New York lacks office space and housing and that rents are so high.

Normally, you'd think builders would be waging an all-out battle to overturn the barriers that make it so hard to build in Gotham. But the major-league New York developers have learned how to thrive in this climate. They know which expensive lawyers to hire and how to get city officials on their side, and they've got enough money to wait the years and years it takes to see a project through and make a big profit. Many belong to what journalist David Samuels calls "the royal families" of New York City real estate: the Brodskys, Dursts, Roses, Rudins, Tishmans, and Trumps who've built in the city for decades. They're like Bolivian tin families, handing down the state-protected business, and all the political connections it takes to flourish in it, from father to son, generation after generation.

In fact, this complex system has turned New York's big developers into a de facto cartel. The system keeps the competition out. It makes it hard for national developers and newcomers, who lack the political know-how and the right political connections, to get a foothold in the city. A senior Giuliani official puts it bluntly: "The present regulations operate as a barrier to entry, and some developers are doing well and don't want competitors." And if the developers don't want change, naturally the consultants, lawyers, lobbyists, and politicians who profit from the existing system don't want to get rid of it, either.

City-planning chief Joseph Rose (himself a member of one of the city's premier real-estate families) discovered the cartel's power when he recently tried to enact modest reforms of the zoning code. Rose's reforms would probably give the city better buildingsthey restrict the sale of air rights that allowed Donald Trump to construct the massive eyesore now rising on 47th Street and First Avenue, for examplebut they leave in place most of the irrational system governing construction. Yet the proposed changes still went nowhere. The Real Estate Board, an industry group that represents New York's leading builders, said the reforms were "the wrong way to go." A major city developer claims Rose never had a chance.

Not all developers oppose shaking things up, however. Two years ago, Douglas Durst and another city developer, Bruce Ratner, complained publicly about the need to make huge political contributions in order to construct anything in the city. Randy Lee, a veteran Staten Island builder, is fed up with dealing with politicians, too. "It's gotten to be too much," he maintains. Other builders, speaking anonymously for fear of antagonizing a key politician or regulator, also express disenchantment with the current system, but not enough to get them to call publicly for major changes that would break up the cartel.

True, changing the zoning rules and the real-estate approval process wouldn't by itself free New York's real-estate development industry from its shackles. After all, even the way the real-estate-tax system works is part of the politicized system. The big players of the cartel routinely negotiate special tax-cut deals. For newcomers, who haven't got the knack of wrangling a tax abatement from the city, the practice is a further deterrent. If they built in New York, they would be competing with builders paying taxes at a lower rate.

Worse still, while government does what it shouldn't do with regulations and taxes, it doesn't do what any government should be doing: keeping criminals out of the construction industry. Stories on New York's mobbed-up construction unions and contractors have dominated headlines lately. Featherbedding, extortion, bid rigging, and other illegal and anticompetitive practices are common, adding a sizable mob tax to the price of construction that helps drive New York's building costs some 35 percent higher than the national average.

As if these problems weren't enough, New York's Buildings Department is notoriously corrupt and inefficient, making the permitting process an expensive, time-consuming headache. Builders often have to bribe department officials to ensure a favorable decision on their permit application, as if they were living in Latin America or the old Soviet Union, and they hire "runners" to stand in line for them at the department and do the stack of requisite paperwork. To its credit, the Giuliani administration has set up a task force to crack down on department corruption, though it will take a major effort in the remaining months of his administration to root it out. The administration has also moved toward putting permitting on line through the city's website to speed things up.

Serious concerns, for sure; but New York could go a long way toward making the developer a builder again instead of a politician by scrapping its current zoning code and replacing it with a new one modeled on the 1916 rules. The new code should be simple, so that builders don't need a zoning change every time they want to build, and it should restrict only egregious ugliness and incompatible uses. Such a reform would free developers from almost always having to go through the ULURP and the state-mandated environmental review, both of which kick in only when projects need zoning changes. It would return building decisions to the market instead of subjecting them to political control.

To adopt a new zoning code might seem a pie-in-the-sky idea, but other big cities, including Minneapolis and San Diego, have scrapped their old codes and started over during the last few years. New York could do it, toothough, given the fate of Rose's mild reforms, it would take truly determined political leadership to pull it off. If the city did adopt a simpler code, builders could again construct the bountiful housing and abundant offices that are signs ofand preconditions fora living, economically vital city.